Purchased inputs increase farming risk

Purchased farm inputs have brought new technology and greater productivity to farming. But relying more on purchased inputs could mean greater financial risks for farmers, according to Forrest Stegelin, University of Georgia agricultural economist.

Many purchased inputs — such as minimum-tillage, genomics and plant breeding and herbicide-resistant varieties — have introduced new technology and made farming more efficient, he says.

"But, relying more on purchased inputs means greater financial risks to farmers because input prices have advanced more than output prices," states Stegelin in the 2004 Georgia Farm Outlook and Planning Guide. With 2004 being an election year, politics may influence the pricing and availability of purchased inputs, as well as production decisions for 2005 and beyond."

A typical discussion of farming inputs focuses primarily on those things that come with written instructions — machinery and equipment, seed, feed, fertilizer and chemicals. But those items without written instructions — management, labor and capital — are equally important, and can mean the difference between success and failure, he says.

"Errors in decision making and usage of factors such as management, labor and capital can truly aggravate the success of a farming business," says Stegelin.

Many factors, he adds, enter into a farmer’s management decisions on production options and their specific farming system, including:

o Knowledge base, personal preferences and management skills.

o The amount of a farmer’s time available in a year.

o Physical features of the land base — amount of land, soil characteristics, layout and topography.

Prices of purchased agricultural inputs always have shown steady increases, says Stegelin, usually at an annual average rate of the cost-of-living increases.

"Of course, some items have recorded large spikes, such as energy and petroleum-based products. But rarely are these due to agricultural demand, whereby price rations supply," he days.

In the past decade, many of the price increases for agricultural inputs were the result of the massive number of mergers, acquisitions, joint ventures, strategic alliances or collaborations and divestitures that occurred in several of the input industries, says the economist.

"For instance, structural changes in the seed industry alone numbered more than 100, as companies reorganized and realigned their brand names, trademarks and product copyrights. As a result, industry consolidation — resulting in highly concentrated agricultural input markets — has occurred. Farmers, as purchasers of these inputs, have witnessed an erosion of competition, ‘inefficient’ markets, and higher prices paid."

Industry leaders, says Stegelin, contend that the technological leaders with successful research and development projects — especially in bioengineering and biotechnology — now can offer new or improved products that enhance the farmer’s own productivity and efficiency.

"An advantage gained through successful research and development can be maintained as long as a technological leader can stay ahead of the competition, sometimes with protection from intellectual property rights such as patents and plant variety protection certificates.

"In some cases, the economic drawbacks of concentrated, non-competitive markets are compensated by the long-term productivity growth associated with technological change."

Consequently, he adds, the industry consolidation features the emergence of "life science" conglomerates — large companies able to apply investments in research and development to both agricultural and pharmaceutical applications.

"However, inevitable subsequent divestiture calls the long-term viability of these conglomerates into question," he says.

"The shares of pesticides, seed, fertilizer, energy and credit in the total value of inputs rose over the past decade, while machinery and equipment’s share has stabilized."

Total fertilizer use has been steady in the United States at about 50 million tons annually, says Stegelin. Application rates per acre now are much higher than 20 years ago, but below the record highs associated with earlier farm bills.

"Less favorable fertilizer-crop price ratios have been the scapegoat," he says. "The United States is a net importer of fertilizers for agriculture except for phosphate, as foreign producers have taken advantage of their lower-cost supplies of natural gas, a nitrogen feedstock. No price shocks are foreseen for the upcoming planting season."

Although some in the industry view the growth of the herbicide-resistant seed varieties occurring at the expense of the chemical input companies, a very strong demand exists for pesticides by farmers, notes Stegelin.

Federal regulation, patent protection, and new pesticide technology were major forces influencing pesticide demand and supply over the past 20 years, he continues.

"Granted, the share of major crop acreage treated with insecticides and herbicides has declined as a result of new seed varieties, farmers still find these chemicals to be cost-effective substitutes for some labor and machinery inputs."

Shifts within the industry occur annually, he says, as pesticides come on or off patent or are canceled by the FDA and EPA. The resulting substitutions of one pesticide for another can lead to localized price hikes, particularly if an affected crop has a large production acreage, he adds.

While the food and fiber sector accounts for 10 to 15 percent of all U.S. energy consumption, it has very little influence on energy prices, says Stegelin. "Farm production uses less than 5 percent of the U.S. energy supply. Price shocks have occurred during the past few winters for natural gas — some shocks resulted from deregulation while others resulted from supply constraints.

"Poultry and egg, greenhouse production, cotton ginning, grain storage and other enterprises that require heating are most vulnerable to seasonal price increases anticipated during the winter months."

Major changes, says Stegelin, have occurred in the kinds of livestock feeds produced as well as in the feed marketing industry, with vertical integration leaning towards raising livestock. Feed firms, he says, continually respond to demand for more supplements, super concentrates, pre-mixes, pelletized feeds and exotic animal rations.

"Feed output is expanding into the Southeast and Pacific states, while companies are improving the nutritional efficiency of their feeds and expanding on-farm animal feeding. With feed grain harvest complete, animal feed manufacturers see no supply shortages of either bagged or bulk feeds for poultry, swine or beef producers in Georgia. Prices will remain nearly constant through the winter and spring of 2004."

A few animal health pharmaceutical firms have ventured into the manufactured feeds business, notes Stegelin. "Many of the feeds - especially for pets — include as ingredients many of the animal health additives that otherwise would be administered separately to the animal. Much consolidation of the animal pharmaceutical industry has occurred in the past few years, due primarily to the high cost of research and development and the product liability concerns. Consequently, animal health products have seen a steep rise in expenditures, while veterinarians have been faced with absorbing the price hikes among their total service charges."

Farm machinery production, says the economist, has risen as an index value - calculated by the Equipment Manufacturers Institute — although total per-unit sales actually have declined during the past 10 years.

Manufacturers of farm machinery have seen inventories of unsold equipment swell alarmingly, revenues cut in half, debt rise sharply with respect to assets and use of plant capacity fall to about 40 to 50 percent, he says.

"A smaller U.S. farm machinery industry is evolving, dominated by three large firms, and they’re out-sourcing parts and components from foreign suppliers. Dealerships are becoming larger with multiple brands, and they’re offering more credit, services and products to farmers.

"Year-to-year sales figures show that 2003 will be a year worth remembering, as numbers or units sold increased in virtually every category of new farm machinery and equipment. Inventory awaits at reasonable prices, even as farmers diversify their enterprises and production activities."